UNVEILING OPPORTUNITIES WITHIN THE RUBBER INDUSTRY 18 DECEMBER 2020 ECONOMIC RESEARCH DR. MOHD AFZANIZAM ABDUL RASHID ADAM MOHAMED RAHIM SHAFIZ BIN JAMALUDDIN NOR JANNAH ABDULLAH Strictly Private & Confidential TABLE OF CONTENT Page 3 GLOBAL OVERVIEW RUBBER INDUSTRY Page 5 LANDSCAPE OF MALAYSIAN RUBBER INDUSTRY Page 7 ISSUES IN MALAYSIA’S NATURAL RUBBER INDUSTRY Page 12 SILVER LINING FOR THE NATURAL RUBBER INDUSTRY Page 20 INITIATIVES BY THE MALAYSIAN RUBBER BOARD Page 22 FORWARD LOOKING STATEMENT ECONOMIC RESEARCH Page 2 GLOBAL RUBBER INDUSTRY OVERVIEW Total Worldwide Rubber Production Total Worldwide Rubber Consumption 30.0 10-year CAGR: 3.1% 29.1 16.0% 30.0 29.1 20.0% 28.7 16.9% 28.8 28.6 10-year CAGR: 3.5% 28.4 11.6% 16.0% 28.0 27.4 12.0% 28.0 27.5 26.4 26.6 26.6 26.0 26.2 12.0% 7.0% 25.7 26.0 25.3 8.0% 26.0 25.5 24.9 25.0 8.0% 4.4% 24.0 3.1% 23.7 2.7% 24.0 3.8% 3.4% 24.0 2.1% 1.7% 4.0% 3.3% 1.6% 2.1% 2.4% 1.7% 2.4% 4.0% 0.5% -1.2% 22.0 -0.9% 22.0 -1.5% 0.0% 0.0% 20.0 -4.0% 20.0 -4.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total Worlwide Rubber Consumption (Natural and Synthetic) Total Worlwide Rubber Production (Natural and Synthetic) (million tonnes) (million tonnes) Year-on-year growth (%) - RHS Year-on-year growth (%) - RHS ✓ Production of rubber (synthetic and natural) has been growing Consumption of Natural Rubber vs. Synthetic Rubber at a 10-year compound annual growth rate (CAGR) of above (million tonnes) 3.0% in light of demand from the automotive and medical 30.0 supplies industry. ✓ However, it is important to note that synthetic rubber (artificially 25.0 produced from a variety of polymers which provides the 15.3 15.2 20.0 14.8 15.2 rubber its properties) has always made up more than half of 14.1 14.0 14.5 13.2 13.9 14.0 the total rubber consumption worldwide given its excellence 15.0 heat resistance. 10.0 ✓ The Association of Natural Rubber Producing Countries (ANRPC) estimated that the consumption of natural rubber in 12.2 12.1 12.7 13.2 13.8 13.6 5.0 10.8 11.0 11.0 11.4 2020 will fall to 12.8 million tonnes (2019: 13.6 million tonnes) before rebounding to 13.4 million tonnes in 2021. Perhaps in the 0.0 longer term, natural rubber would be able to regain market 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 share from synthetic rubber in terms of consumption if industries Natural Rubber Synthetic Rubber such as rubber gloves shift more towards the usage of natural Sources: Rubber Statistical Bulletin, Malaysian Rubber Board rubber for production. ECONOMIC RESEARCH Page 3 LANDSCAPE OF GLOBAL NATURAL RUBBER Natural Rubber Supply Surplus/Deficit ('000 tonnes) 1000 840 861 800 612 600 400 331 321 287 205 123 136 200 122 72 82 25 7 0 -200 -52 -82 -38 -400 -241 -356 -374 -600 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020F 2021F 2022F 2023F 2024F 2025F 2026F 2027F 2028F 2029F Source: International Rubber Study Group SGX Technically Specified Rubber 20 Futures 1st ✓ At the moment, the natural rubber oversupply could Month stymie price growth for another six years before a deficit (USD/100 kg) in supply occurs in 2027 according to the International 600.00 1Q2011: Rubber Study Group. USD522.05 per ✓ Therefore, rubber prices (refer to chart on the left) may 500.00 100 kg remain below the USD200.00 per 100 kg level amid 400.00 4Q2020:USD153.11 excess supply while a retreat to a low of USD115.94 per per 100 kg* 300.00 100 kg appears less likely as demand may stay elevated 200.00 relative to pre-pandemic levels even in 2022. 100.00 ✓ In addition, petroleum-based synthetic alternatives have 0.00 continued to gain market share, constraining natural rubber's demand growth worldwide. ✓ The recent price strength may have been driven by 3Q2007 1Q2009 4Q2015 2Q2017 4Q2006 2Q2008 4Q2009 3Q2010 2Q2011 1Q2012 4Q2012 3Q2013 2Q2014 1Q2015 3Q2016 1Q2018 4Q2018 3Q2019 2Q2020 1Q2006 adverse weather affecting production, which tends to Source: Bloomberg *Latest quarter-to-date average be short-lived. ECONOMIC RESEARCH Page 4 TRENDS FOR NATURAL AND SYNTHETIC RUBBER CONSUMPTION IN MALAYSIA Rubber Consumption in Malaysia Year Natural Rubber ('000 Tonnes) Synthetic Rubber ('000 Tonnes) Total Rubber Consumption ('000 Tonnes) Natural Rubber:Synthetic Rubber Ratio 2010 457.9 185.1 643.0 71:29 2011 401.9 226.0 627.9 64:36 2012 441.4 258.6 700.0 63:37 2013 434.2 290.7 724.9 60:40 2014 447.5 353.2 800.7 56:44 2015 474.8 418.8 893.6 53:47 2016 486.1 419.0 905.1 54:46 2017 488.9 446.7 935.6 52:48 2018 515.6 470.4 986.0 52:48 2019 515.5 475.7 991.2 51:49 9M2020 382.3 404.2 786.5 49:51 Source: Malaysian Rubber Board Consumption Breakdown of Natural ✓ In Malaysia, the consumption of synthetic rubber Rubber in Malaysia has been gradually increasing since 2010 until now, similar to the trends observed on the global 11.1% level as highlighted earlier. ✓ For instance, the consumption of ratio of natural rubber to synthetic rubber was at 71:29 in 2010 88.9% compared to 9M2020 which stood at 49:51. ✓ Within the natural rubber category which is further divided into dry rubber and latex rubber, the consumption of latex makes up the bulk of Dry Rubber Latex Rubber consumption at nearly 90.0%. Source: Malaysian Rubber Board Note: As at 9M2020 ECONOMIC RESEARCH Page 5 PRODUCTION VS. CONSUMPTION OF LATEX RUBBER IN MALAYSIA Latex Production vs. Latex Consumption in Natural Rubber Production and Planted Area of Malaysia Natural Rubber in Malaysia and Vietnam in 2019 500.0 451.6 Natural Rubber Planted Area of 393.4 400.0 Country Production Natural Rubber ('000 tonnes) ('000 Hectares) 300.0 339.7 Malaysia 639.8 1,113.0 200.0 92.4 100.0 36.2 22.6 Vietnam 1,285.2 962.0 0.0 Source: Malaysian Rubber Board Latex Production ('000 Tonnes) Latex Consumption ('000 Tonnes) Source: Malaysian Rubber Board Consumption of Capacity from about 1.0 ✓ While latex rubber consumption is way higher compared to latex products in million hectares of total dry rubber consumption, the amount of latex produced by Malaysia increased. planted area not fully Malaysia is significantly lower. utilized! ✓ In 2019, only 36,200 tonnes of latex rubber was produced while 451,600 tonnes of latex were consumed in Malaysia. BUT ✓ Aside from that, the planted area of natural rubber in Malaysia of 1.1 million hectares is slightly larger than Vietnam’s 1.0 million hectares. However, Vietnam’s 639,800 tonnes of natural production of natural rubber is almost double compared to rubber produced in 9M2020: 339,694 tonnes Malaysia’s. 2019, out of 1.1 million 9M2019: 328,945 tonnes ✓ The wide gap between production and consumption of latex tonnes of potential in Malaysia combined with the large planted area of natural capacity. rubber unveils an issue for rubber producers particularly latex Source: Malaysian Rubber Board and smallholders in realising their full potential. ECONOMIC RESEARCH Page 6 THE UNDERLYING ISSUE IN MALAYSIA’S NATURAL RUBBER INDUSTRY PARTICULARLY LATEX RUBBER WHY IS Difference between benchmark MALAYSIA’S Preferred mode of rubber price and latex rubber price. LATEX RUBBER production. ✓ The price of bulk latex which is lower PRODUCTION ✓ Producing cup lumps is relative simpler than SMR 20 benchmark is a LOW? process. disincentive to produce latex. Latex Rubber Production Cup Lump Rubber Production More work as tapping is Just requires tapping and done in the morning and leaving the latex to coagulate the latex is later collected Standard Malaysian Rubber Price vs. Bulk Latex overnight. Price (RM/kg) in the afternoon. Source: The Edge Markets Weekly 8.00 ✓ Cup lump rubber is more cost efficient. 7.00 6.35 The premium in farmgate prices of latex 5.85 compared to cup lump does not justify 6.00 the time and effort that is required in 5.82 5.00 extracting the latex. Average Farmgate Price of Rubber in Peninsular 4.004.52 Malaysia (RM/kg) Year Latex Cuplump 3.00 2013 6.93 6.33 2014 4.89 4.26 2015 4.27 4.01 9-Jul-20 2-Jan-20 30-Jul-20 1-Oct-20 5-Mar-20 3-Dec-20 2016 5.31 4.42 7-May-20 18-Jun-20 16-Apr-20 23-Jan-20 13-Feb-20 10-Sep-20 22-Oct-20 26-Mar-20 12-Nov-20 20-Aug-20 28-May-20 2017 6.70 5.48 Standard Malaysian Rubber-SMR 20 (RM/kg) 2018 4.43 4.01 2019 4.79 4.37 Bulk Latex (RM/kg) 9M2020 4.74 3.89 Source: Malaysian Rubber Council ECONOMIC RESEARCH Source: Malaysian Rubber Board Page 7 EXPORTS AND IMPORTS OF NATURAL RUBBER ✓ The lower scale of natural rubber production compared to the consumption of natural rubber in Malaysia has led to a higher imports of rubber than exports. Weightage, % Exports performance 10M2020: 96.2% 900.0 5.0% SMR 3.7% 10M2019: 95.8% 700.0 642.0 631.3 0.0% Latex 10M2020: 3.6% 447.1 500.0 Concentrate 10M2019: 3.7% -5.0% 300.0 Ribbed Smoke 10M2020: 0.1% 100.0 -10.0% Sheet 2015 2016 2017 2018 2019 10M2020 10M2019: 0.4% tonnes, '000 y-o-y growth,% (RHS) Imports performance Weightage, % Latex 1,200.0 30.0% 10M2020: 29.6% Concentrate 10M2019: 31.4% 20.0% 1,100.0 19.6% 1,082.7 10.0% 10M2020: 16.1% 1,000.0 975.4 Standard Rubber 0.0% 10M2019: 22.4% 900.0 -10.0% Ribbed Smoke 10M2020: 2.8% 800.0 -20.0% 2015 2016 2017 2018 2019 10M2020 Sheet 10M2019: 4.6% tonnes, '000 y-o-y growth,% (RHS) Sources: DOSM, CEIC ECONOMIC RESEARCH Page 8 EXPORT AND IMPORT TRENDS OF NATURAL RUBBER FOR MALAYSIA Exports, y-o-y% ✓ Under further scrutiny, exports of natural rubber increased by 7.7% y-o-y in October from 1.4% growth 40.0% in the previous month.